衍生品证券DerivativesChapter4.ppt

1,Derivative Securities SAIF Dr. Ming Guo,Chapter 4: Introduction to Risk Management,2,Chapter Outline,Basic risk management: the producers perspective Basic risk management: the buyers perspective Why do firms manage risk? Reasons to hedge or not to hedge Empirical evidence on hedging Section 4.5 will not be covered or tested!,3,Basic Risk Management,Firms convert inputs into goods and services output input commodity producer buyer A firm is profitable if the cost of what it produces exceeds the cost of its inputs A firm that actively uses derivatives and other techniques to alter its risk and protect its profitability is engaging in risk management,4,The Producers Perspective,A producer selling a risky commodity has an inherent long position in this commodity When the price of the commodity , the firms profit (assuming costs are fixed) Some strategies to hedge profit Selling forward Buying puts Selling a call Buying collars,5,Golddiggers: Producer,Plan to mine and sell 100,000 ounces of gold over the next year. Fixed cost: $330 per ounce Variable cost: $50 per ounce Current gold price: $405 per ounce (in 2005) Price of one-year gold forward is $420 per ounce What is current gold price? /spot-gold.html,6,Producer: Hedging With Forwards,A short forward contract allows a producer to lock in a price for his output Example: the firm enters into a short forward contract, agreeing to sell gold at a price of $420/oz. in 1 year.,7,Producer: Hedging With a Put Option,Buying a put option allows a producer to have higher profits at high output prices, while providing a floor on the price Example: the mining firm purchases a 420- strike put at the premium of $8.77/oz,8,Producer: Insuring by Selling a Call,A written call reduces losses through a premium, but limits possible profits by providing a cap on the price Example: the mining firm sells a 420-strike call and receives an $8.77 premium,9,Adjusting the Amount of Insurance,Insurance is not free!in fact, it is expensive How to reduce the cost of insurance (at the same time, reducing the benefit of insurance)? In the case of hedging against a price decline by purchasing a put option, one can using a put with a lower strike price instead lower the price in addition, sell a call reduce the total price,10,Gold Options,Call and put premiums for gold options with one year until expiration.,11,Figure 4.5 Comparison of profit for Golddiggers using three different put strikes.,12,Figure 4.8 Profit diagram for 420-440 gold collar,13,Figure 4.9 Comparison of Golddiggers hedged with 420-strike put versus hedged with 420-strike put and written 440-strike call (420440 collar).,14,The Buyers Perspective,A buyer that faces price risk on an input has an inherent short position in this commodity When the price of the input , the firms profit Some strategies to hedge profit Buying forward Buying calls Selling collars,15,Buyer: Hedging With Forwards,A long forward contract allows a buyer to lock in a price for his input Example: a firm, which uses gold as an input, purchases a forward contract, agreeing to buy gold at a price of $420/oz. in 1 year (revenue after other cost adjusted: $460/oz),16,Buyer: Hedging With a Call Option,Buying a call option allows a buyer to have higher profits at low input prices, while being protected against high prices Example: a firm, which uses gold as an input, purchases a 420-strike call at the premium of $8.77/oz,17,Why Do Firms Manage Risk?,Hedging changes the distribution, not the value, of cash flows. Golddiggers example: the hedging strategies shift dollars from more profitable states (when gold prices are high) to less profitable states (when gold prices are low). Hedging can be optimal for a firm when an extra dollar of income received in times of high profits is worth less than an extra dollar of income received in times of low profits.,18,An Example,How hedge adds value Consider a firm with cost per unit of $10 The selling price is either $11.20 or $9, with 50% probability Thus, the firm has either a $1.20 profit or $1 loss The expected profit per unit = _$0.10_ If the tax rate on profit is 40%, after-tax profit is either $0.72 or $1 After-tax expected profit = _-$0.14_,19,An Example (contd),If the firm sells forward at strike $10.10 The profit is fixed at $0.10 with certainty After-tax profit per unit is $0.06,After-tax profit,Selling price,Slope = 1,Slope = 1-tax rate,A,B,C,D,-$0.14,$0.06,20,Why Do Firms Manage Risk?,Concave profits can arise from Taxes: differential taxation treatment on gains or losses, capital or ordinary incomes, across countries Bankruptcy and distress costs: avoid huge loss Costly external financing: smooth cash reserves in the firm Preservation of debt capacity: reduce riskiness of cash flows Managerial risk aversion: reduce firm risk,21,Reasons Not to Hedge,Reasons why firms may elect not to hedge Transaction costs of dealing in derivatives (such as, commissions and the bid-ask spread) The requirement for costly expertise The need to monitor and control the hedging process Complications from tax and accounting considerations Potential collateral requirements,22,What can Go Wrong?,One of the risks faced by a company that trades derivates: an employee who has a mandate to hedge or to look for arbitrage opportunities may become a speculator. Barings Bank Case: One of the most infamous tales of financial demise This 200-year-old British bank was wiped out in 1995 by the activities of one trader, Nick Leeson, in Singapore,23,In 1993, Nick Leeson was appointed general manager of the banks Barings Futures subsidiary in Singapore. The mandate is to look for arbitrage opportunities between the Nikki 225 futures price on the Singapore exchange and the Osaka exchange. Over time, Leeson moved from being an arbitrageur to being a speculator: bets on the future direction of the Nikkei 225 using futures and options. When incurring losses, he began to take bigger speculative positions. By the time Leesons activities were uncovered, the total loss was close to one billion dollars.,24,Barings Bank Case,One trading strategy Leeson used: written straddle selling put and call options on the Nikkei 225 Index. A written straddle is a bet on the volatility being low. Hence it will produce positive earnings when markets are stable but can result in large losses if markets are volatile. When an earthquake in Japan caused a steep drop in the Nikkei 225 equity index, Leesons unauthorized trading positions suffered huge losses and his operation unraveled.,25,Barings Bank Case,Leeson managed both the trading and back office function as the general manager. Thus he was able to conceal his unauthorized trading activities for over a year. The senior managers at Barings came primarily from a merchant banking background and knew very little about trading. In March 1995, Dutch banking group ING bought Barings for one British pound, assumed its debts, took over operations and renamed it ING Barings.,26,Leeson Afterwards,Leeson pleaded guilty to fraud and